Brexit proves it once again – gold is great insurance

Every portfolio should include some gold. Not only because gold prices are probably headed higher, but also because gold is one of the best hedges against market volatility. When markets fall, gold prices normally head higher.

(More information on why you should own gold is found in Truewealth Publishing’s latest special report that you can download for free here.)

This is because gold has a very low correlation with most stock markets, as shown below.

If you invested in the Straits Times Index (STI) and the MSCI World Index, chances are good both markets would move in the same direction when the next Brexit-type event happens. This is because they have a correlation of 0.82. The closer a correlation is to 1, the more the two variables move in tandem.

On the other hand, if you owned the MSCI World Index (using an ETF, for example) and gold, you would be better insulated when global markets fall. That’s because the MSCI World Index and gold have a correlation of just 0.13. As this number approaches zero, or turns negative, the more each asset moves independently.

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Often, during times of crisis, gold and markets move in opposite directions, which improves the insurance value of gold.

For example, the September 11, 2001 attacks in the U.S. rattled stock markets. The New York Stock Exchange (NYSE) was closed for one week following the collapse of the World Trade Centre. Once markets opened, shares on the NYSE saw some of their biggest weekly losses in history. The U.S.-based Dow Jones Industrial Average lost 14 percent, and the S&P 500 lost almost 12 percent that week.

They did recover some of the losses by the end of the month, but it was still a bad time to own stocks.

And gold? By September 28, the last trading day of the month, it had gained 7 percent since 9/11.

Gold was similarly valuable during the market trauma of the global economic crisis. As the world absorbed the fallout from the U.S. subprime mortgage debacle, the global financial system teetered on the edge of collapse. Governments had to intervene to keep the situation from destroying entire economies and to prevent the next Great Depression.

And global stock markets crashed. In 2008, Singapore’s STI lost 49 percent. The S&P 500 fell 38 percent. And Asian markets, measured by the MSCI Asia ex Japan index, were down 54 percent. It was one of the worst years in stock market history.

Earlier this year, markets also reeled due to worries over China’s economy and the devaluation of the renminbi. Many markets around the world entered bear market territory – meaning they were down 20 percent from their recent peaks. Hong Kong’s Hang Seng index lost 11 percent that month. And the MSCI World Index was down 6 percent.

But gold proved once again why it is one of the best hedges against tumbling markets. It gained 5 percent in January… on its way to its best quarterly performance since 1986.

Finally, last week, British citizens caught markets off guard when they voted to leave the European Union. And stock markets panicked once again – the MSCI World Index fell nearly 5 percent in one day, and the Hang Seng and the STI were both down nearly 3 percent.

But in the short term, gold once again prevailed – it gained 4.7 percent last Friday.

Gold prices move in the other direction as well. From its recent peak in August 2011 until its low in December 2015, gold prices fell 44 percent. During that period, many global stock markets were moving up (the MSCI World Index appreciated 46 percent). Regardless, a well-diversified portfolio should include gold. It’s consistently done better than stocks during market shocks, and can help prevent huge stock market losses from decimating your portfolio.

As we’ve mentioned before, an easy way to own gold is to use a gold ETF. The SPDR Gold Shares ETF is available on the Singapore exchange (code: O87), the Hong Kong market (code: 2840) and the New York Stock Exchange (ticker: GLD). The Value Gold ETF (code: 3081) is also a popular choice in Hong Kong.

Other ways to own gold, and more reasons to own it, are outlined in our latest special report. You can download it for free here.

Kim Iskyan

About Kim Iskyan

Kim Iskyan has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets.

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